Question 2 Rusty Redlow has always independently managed his personal investment portfolio. After a 25- year career as a chemical engineer with a large chemical company, Rusty retired and on January 1, 2014, opened an investment advisory business incorporated as R&R Financial Planning LLC. Rusty was eager to share his knowledge and investing experience with people in similar positions to himself; that is, those who have recently retired. Also, Rusty has discovered there is an unmet need for financial-planning advice for people living in rural areas. Through his parents, Rusty has learned that there are many seniors who cannot, or prefer not to, drive to larger cities for financial-planning help. Therefore, unlike other financial-planning firms, Rusty drives to his sometimes-remote rural clients who can be many kilometres from his home. The first year of operations of Rusty's company was very successful, and he quickly built his client list to 35 (which is the maximum he plans to serve). However, despite this success, his firm lost several thousand dollars last year. Prior to offering his services, Rusty had investigated client fee structures of several other firms. He discovered that some firms charge clients based on a percent of the amount of client investment dollars under management, some combine a fixed annual fee with a smaller percent of client investment amounts, and others charge an hourly fee. Rusty decided to charge clients a fixed fee for the first year. Because of an operating loss in 2014, however, Rusty is looking for help to analyze his financial results and is seeking advice on how much to charge clients in 2015. In his first year of operations, he found some clients require very little time while others call frequently and demand visits and monthly hard copies of statements. (Many older clients do not have Internet or email access and prefer face-to-face meetings.) Therefore, Rusty is considering a fee structure not currently being used in the industry; specifically, he would like to charge an annual fixed fee combined with a variable portion based on time spent on each client account (information he has carefully tracked during the first year). He believes this would better reflect the cost to service the various clients. Because most clients are in rural areas, on average, more than 90% of Randy's time is spent driving to and from the client. The firm employs an assistant to help with administrative responsibilities, and this person works 20 hours per week out of Rusty's home office. Rusty also contracted with another local person to help once a month with the preparation and mailing of a monthly investment news and portfolio update. The following sets out the operating results of R&R Financial Planning for 2014. Cost categories: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Financial planner salary (Rusty Redlow) $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 Assistant salary (extra quarter- end help) 950 950 950 950 95 950 950 950 950 950 950 950 Internet subscription 135 135 135 135 135 135 135 135 135 135 135 135 Bloomberg monthly data feed 220 220 220 220 220 Occ 220 220 220 220 220 220 Depreciation (office equipment) 80 80 80 RO 80 80 80 80 80 80 80 80 Depreciation (car) 380 380 380 380 380 380 380 380 380 380 380 380 Car - road side assist., Mice and Gas 308 190 185 210 170 55 59 120 155 214 168 168 Supplies 644 505 500 551 514 440 475 500 500 540 500 480 Insurance 102 102 102 102 102 102 102 102 102 102 102 102 Portfolio information and mailing 36 29 14 22 18 13 12 14 29 12 15 Utilities 145 120 110 112 92 104 111 119 131 110 116 Total $7,500 $7,211 $7,176 $7,275 $7,181 $6,962 $7,018 $7,110 $7,155 $7,281 $ $7,157 $7,146 Hours with clients (includes driving time) 254 148 142 149 109 19 21 55 85 151 105 110 combest Required: 1. Determine the independent variable and use the 2014 data above to determine which costs are variable (V), mixed (M), or fixed (F). (3 marks) 2. Use the high-low method to separate fixed costs per month and the variable costs. (6 marks) 3. Recommend a fee structure for Rusty, assuming his goal is to break even (including Rusty's annual salary). The fee should include a fixed cost per client based on the stated maximum of 35 clients and a variable portion. (3 marks) 4. If Rusty were to record odometer readings when visiting clients, could this data be used to improve the variable charge rate? Would this change the classification of any of the cost categories